Interest Only Home Loans Australia - what you need to know
Wed Jun 12 00:00:00 AEST 2013
An interest only home loan may allow increased cash flow and flexibility, however may not be the best option for every type of borrower. While interest only repayments are lower on this type of home loan than a principal and interest loan, by not paying any amount of the principal can be risky - however, if you are a savvy investor, interest only may prove a profitable option.
Under an interest only home loan, the borrower only makes repayments on the interest, not the principal amount borrowed, when they make their home loan repayments. This makes your repayments significantly lower from month to month, as you will see if you use Choice’s home loan calculator to compare interest-only and regular principal and interest (P&I) repayments.
An interest only home loan is usually available for a maximum term of seven years, so if you’re in a situation where your cash flow is temporarily tight - for instance, if you’re building or renovating your home and having to rent an additional property in the meantime - it could be useful to take out an interest only home loan during this time.
Interest only loans are also useful for those who are thinking of buying an investment property. The lower up-front costs in interest only loans allow an investor to own more than one home at once without the hassle of making full repayments of principal and interest on each. Provided they earn a good profit on the sale of their investment property, they will still make money after they have paid the loan back in full.
The main risk with this type of loan is the time restriction. For investment buyers, if the market has not grown strongly enough at the end of the loan term you may be forced to sell your property at a loss to pay back your home loan. For regular borrowers, the danger is that you will get used to the lower repayments and be hit with a major shock when your interest-only term ends and you must also start to pay back the principal.
For this reason, it is best to think carefully about getting an interest only loan if you are shopping for your first home loan. If you are not yet able to afford full repayments on the property you want to buy, you may want to think about saving a little longer for a deposit or downgrading your price range.
Although they are less common than standard mortgages, interest only home loans are still worth investigating, so you may want to discuss your options with a mortgage broker. Choice Home Loans mortgage brokers can give you more detailed information on the advantages and risks of an interest only home loan, and help you decide if it is right for you.
Enquire online today to make an appointment with one of our friendly and experienced mortgage brokers.
Contact a Choice Home Loans broker
Find a broker
Use our broker services search tool to find brokers available in your area
This article is written to provide a summary and general overview of the subject matter covered for your information only. Every effort has been made to ensure the information in the articles is current, accurate and reliable. This article has been prepared without taking into account your objectives, personal circumstances, financial situation or needs. You should consider whether it is appropriate for your circumstances. You should seek your own independent legal, financial and taxation advice before acting or relying on any of the content contained in the articles and review any relevant Product Disclosure Statement (PDS), Terms and Conditions (T&C) or Financial Services Guide (FSG).